IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
KITTIE LAPERRIERE, on behalf )
of herself and all others )
similarly situated, )
) CIVIL ACTION NO.
Plaintiffs )
) 98-AR-1407-S
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
(CAPTION CONTINUED ON NEXT PAGE)
MEMORANDUM OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE
HARVEY J. GOLDSCHMID
General Counsel
ERIC SUMMERGRAD
Principal Assistant General Counsel
LUIS de la TORRE
Attorney
Of Counsel
PAUL GONSON
Solicitor Securities and Exchange Commission
450 5th Street, N.W. (Stop 6-6)
Washington, D.C. 20549
(202) 942-0813 (de la Torre)
Dated: September 24, 1998
(CAPTION CONTINUED)
LEON KUTCHER, on behalf of )
himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-P-1413-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
JAMES BRANNON, individually )
and on behalf of all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-C-1429-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
ROBIN PITTMAN, individually )
and on behalf of all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-N-1440-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
DAVID LABARRE, on behalf of )
himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-C-1430-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
RICHARD S. ROCHE, individually )
and on behalf of all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-TMP-1444-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
KARL ANDERSON, on behalf of )
himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-B-1491-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
JOSEPH E. KOVACS, on behalf of )
himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-B-1519-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
BRENT J. SORRENTINO, on his own )
behalf and on behalf of all )
others similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-P-1553-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
LEON J. FIEGEL, IRA, on behalf )
of himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-JEO-1650-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
RICHARD M. SULLIVAN, on behalf )
of himself and all others )
similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-C-1735-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
RUTH GOLD, on behalf of )
herself and all others )
similarly situated, )
) CIVIL ACTION NO.
Plaintiffs )
) 98-S-1761-S
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants )
)
KENSINGTON CAPITAL MANAGEMENT, )
on behalf of itself and all )
others similarly situated, ) CIVIL ACTION NO.
)
Plaintiffs ) 98-TMP-1898-S
)
vs. )
)
VESTA INSURANCE GROUP, INC., )
ET AL., )
)
Defendants. )
)
MEMORANDUM OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE
INTRODUCTION AND SUMMARY OF THE COMMISSION'S POSITION
Pursuant to the Court's order dated August 28, 1998, the Securities
and Exchange Commission respectfully submits this memorandum, as amicus
curiae, to address, as requested by the order, (a) "whether these thirteen
cases, or any portion of them, should be consolidated, and, if
consolidated, what limitations on the consolidation, if any, should be
imposed" and (b) "which `lead plaintiff' under 15 U.S.C. 78u-4 should be
named by the court." In responding to the latter question, the Commission
will urge, as permitted by the order, two points set forth in its motion
for leave to participate in this case: (1) that, in considering the
application of multiple plaintiffs jointly seeking to be appointed lead
plaintiff, the Court should limit the proposed lead plaintiff "group" to a
small number capable of most effectively managing the litigation and
exercising control over counsel; and (2) that the Court should not appoint
competing applicants as co-lead plaintiffs.
Defendants have filed an unopposed motion to consolidate these cases.
The "Vesta Plaintiffs Group," which consists of 29 individuals and three
entities, has moved to be appointed lead plaintiff in these cases under the
Private Securities Litigation Reform Act of 1995 (the "Litigation Reform
Act" or "Act"), codified at Section 21D of the Securities Exchange Act of
1934 ("Exchange Act"), 15 U.S.C. 78u-4. The Vesta Plaintiffs Group has
moved, in the alternative, that, first five, and then, nine, of its members
with the most losses be appointed lead plaintiff.
The Florida State Board of Administration ("Florida Board" or "Board") has
separately moved to be appointed lead plaintiff.
The Commission has reviewed the consolidation and lead plaintiff
motions, the supporting memoranda and exhibits, the responses, and the
transcript of the August 28, 1998 hearing at which the Court heard argument
on these motions. The Commission is aware of no reason that all
of the actions should not be consolidated without limitation.
The Commission believes that once the Vesta Plaintiffs Group is
limited to a size capable of effectively managing the litigation and
supervising the lawyers, the Florida Board has the largest financial
interest in the litigation and thus, under the terms of the Litigation
Reform Act, is presumptively the most adequate plaintiff. Under the Act,
that presumption can only be rebutted by "proof" that the Board "will not"
be an adequate lead plaintiff. Mere surmises or speculative assumptions
about potential conflicts of interest will not suffice. The Commission,
however, does not believe that it is in a position, as amicus curiae, to
determine if such proof has been adduced here. Finally, regardless of whom
the Court appoints as lead plaintiff, the Commission believes that the
The transcript of the August 28, 1998 hearing is cited
herein as "Tr. __"; the August 26, 1998 Joint
Memorandum of Law of the LaPerriere and Gold Groups in
response to the Commission's motion for leave to appear
as amicus as "Jt. Resp. __"; the Florida Board's August
26, 1998 Supplemental Memorandum of Law in support of
its lead plaintiff motion as "Bd. Supp. Mem. __"; the
August 25, 1998 Joint Memorandum of Law of the
LaPerriere and Gold Groups in support of their lead
plaintiff motions as "Jt. Mem. __"; the July 31, 1998
LaPerriere Group memorandum of law in support of their
lead plaintiff motion as "LaP. Mem." Unpublished cases
cited in this memorandum can be found as exhibits
either to Bd. Supp. Mem. or Jt. Mem.
======END OF PAGE 2======
Court should not appoint competing lead plaintiff movants as "co-lead
plaintiffs."
BACKGROUND
A. The Litigation Reform Act and Its Lead Plaintiff Provisions
The Commission has long expressed the view that legitimate private
actions under the federal securities laws serve an important role, both
because they work to compensate investors who have been harmed by
securities law violations and because, as the Supreme Court has repeatedly
recognized, they "provide `a most effective weapon in the enforcement' of
the securities laws and are `a necessary supplement to Commission action.'"
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985),
quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964); see also Blue
Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
In adopting the Litigation Reform Act, Congress affirmed that
"[p]rivate securities litigation is an indispensable tool with which
defrauded investors can recover their losses" and that private lawsuits
"promote public and global confidence in our capital markets and help to
deter wrongdoing and to guarantee that corporate officers, auditors,
directors, lawyers and others properly perform their jobs." Conference
Report on Securities Litigation Reform, H.R. Rep. No. 104-369, 31 (1995)
("Conf. Rep."). One of the objectives of the lead plaintiff provisions was
to ensure the most effective representation of investors' interests in
private class actions. E.g., id. at 32-35.
In pertinent part, the Litigation Reform Act generally provides that
"the court * * * shall appoint as lead plaintiff the member or members of
======END OF PAGE 3======
the purported plaintiff class that the court determines to be most capable
of adequately representing the interests of class members (hereafter in
this paragraph referred to as the `most adequate plaintiff') in accordance
with this subparagraph." The Act then specifies that "the court shall
adopt a presumption that the most adequate plaintiff in any private action
arising under this title is the person or group of persons that" has filed
a complaint or moved to be appointed as lead plaintiff and which meets two
other criteria:
(1) in the determination of the court, has the largest financial
interest in the relief sought by the class; and
(2) otherwise satisfies the requirements of Rule 23 of the
Federal Rules of Civil Procedure.
The presumption "may be rebutted only upon proof by a member of the
purported plaintiff class that the presumptively most adequate plaintiff *
* * will not fairly and adequately protect the interests of the class * * *
or is subject to unique defenses that render such plaintiff incapable of
adequately representing the class." 15 U.S.C. 78u-4(a)(3)(B)(i) &
(a)(3)(B)(iii).
B. Legislative History Of The Lead Plaintiff Provisions
The Litigation Reform Act was enacted in December 1995 over a
presidential veto. See 141 Cong. Rec. H15223-224 (Dec. 20, 1995), S19180
(Dec. 22, 1995). The President, however, had not objected to the Act's
lead plaintiff provisions. See 141 Cong. Rec. H15214-215 (Dec. 20, 1995)
(Dec. 19, 1995 veto message).
The Act further provides that "[t]he most adequate
plaintiff shall, subject to the approval of the court,
select and retain counsel to represent the class." 15
U.S.C. 78u-4(a)(3)(B)(v).
======END OF PAGE 4======
The lead plaintiff provisions arose out of Congress' concern,
reflected in the House, Senate, and Conference Committee Reports on the
legislation, that some class action securities litigation had become a
"lawyer-driven" enterprise, in which law firms sought to bring cases and
then sought out plaintiffs in whose name they could sue.
Congress sought to "protect[] investors who join class actions against
lawyer-driven lawsuits by giving control of the litigation to lead
plaintiffs with substantial holdings of the securities of the issuer."
Conf. Rep. 32; accord S. Rep. 4 (Congress "intends * * * to empower
investors so that they -- not their lawyers -- exercise primary control
over private securities litigation"), 6 ("to transfer primary control of
private securities litigation from lawyers to investors"), 10 ("The lead
plaintiff should actively represent the class. The Committee believes that
the lead plaintiff -- not lawyers -- should drive the litigation."). This
concern also was expressedrepeatedly during floor debate onthe legislation.
Congress was particularly concerned that in some such
cases the lawyers engage in abusive practices and
"often receive a disproportionate share of settlement
awards." Conf. Rep. 36; accord id. at 31-33; Report on
the Private Securities Litigation Reform Act of 1995,
S. Rep. No. 104-98, 6-12 (1995) ("S. Rep."); Report on
the Common Sense Legal Reform Act of 1995, H.R. Rep.
No. 104-50, 14-20 (1995) ("H. Rep.").
See, e.g., 141 Cong. Rec. S8895 (Sen. D'Amato) ("the
legislation empowers investors so that they, not their
lawyers, have greater control over their class action
cases"), S8897 (Sen. Domenici) ("So what we have and
what is wrong with this system is very, very
fundamental. Lawyers, not clients, control these
cases.") (June 22, 1995); 141 Cong. Rec. S9040 (Sen.
Domenici), S9055 (Sen. Frist) ("the lawyer-driven
nature of these lawsuits tends to shortchange investors
who have truly been defrauded"), S9065 (Sen. Grams)
("the plaintiff who is bringing the suit [now] * * *
(continued...)
======END OF PAGE 5======
(...continued)
this is basically the attorney"), S9075-76, 77 (Sen.
Hatch) ("the bill contains a number of reforms of
securities litigation class actions that are designed
to increase participation of the real shareholder
plaintiffs and decrease the control of attorneys"),
S9077 (Sen. Murray) ("[investors] have a right to have
more of a say in steering the course of litigation")
(June 26, 1995); 141 Cong. Rec. S9172 (Sen. Hatfield)
("This legislation is about curtailing the abuses in
this country's securities litigation system and
empowering defrauded investors with greater control
over the class action process."), S9173 (Sen. Mikulski)
("with this bill, the court will be able to pick one
person -- who has lost a lot of money in a class action
suit -- to be the leader. This way the system works
for investors instead of against them," as when
"lawyers seek out clients just so they can have cases
to litigate") (June 27, 1995); 141 Cong. Rec. S9212
(Sen. Domenici) ("[bill] puts investors with real
financial interests, not lawyers in charge of the
case"), S9321 (Sen. Dodd) ("[bill] empowers investors
so that they, not their lawyers, have greater control
over their class action cases") (June 28, 1995); 141
Cong. Rec. S17934 (Sen. D'Amato) ("[Bill] will empower
real investors, especially pension funds and other
institutional investors, to take control of the
lawsuit."), S17956 (Sen. Dodd) ("[bill] empowers
investors so that they, not their attorneys, have the
greater control over the class action cases"), S17967,
17969 (Sen. Domenici) ("[Bill] contains provisions
which place investors, not lawyers, in control of the
lawsuit. Unlike the current lawyer-driven system,
under this new law the investors with the greatest
stake in the outcome of the litigation will control the
case."), S17980 (Sen. Murray) ("[bill] will reform our
securities law so that investors will have more of a
say in the outcome of their suit."), S17982 (Sen.
Frist), S17983 (Sen. Dole) ("[bill] diminishes the
likelihood that these cases will be driven by lawyers,
instead of real plaintiffs by allowing the most
adequate plaintiff to be the party with the greatest
financial interest"), S17984 (Sen. Moseley-Braun)
("Many investors also support this bill because it
gives them, rather than the lawyers who are supposed to
be working for them, control of any class action suits
filed. It is the client, rather than the attorney,
that is supposed to control a lawsuit, and part of the
reason this bill is so necessary is that this simple
(continued...)
======END OF PAGE 6======
Congress viewed this problem as stemming from the fact that the lead
counsel in the case commonly had a greater financial stake in the
litigation than did the plaintiffs. See, e.g., S. Rep. 6-7. The House
Report stated, H. Rep. 17-18:
Throughout the process, it is clear that the plaintiff
class has difficulty exercising any meaningful
direction over the case brought on its behalf. * * *
Because class counsels' fees and expenses sometimes
amount to one-third or more of recovery, class counsel
frequently has a significantly greater interest in the
litigation than any individual member of the class.
Furthermore, class counsel * * * may have a
greater incentive than the members of the class to
accept a settlement that provides a significant fee and
eliminates any risk of failure to recoup funds already
invested in the case.
The lead plaintiff provisions were "intended to encourage the most
capable representatives of the plaintiff class to participate in class
action litigation and to exercise supervision and control of the lawyers
for the class." Conf. Rep. 32. They were "intended to increase the
likelihood that parties with significant holdings in issuers, whose
(...continued)
principle has somehow gotten lost in recent years.")
(Dec. 5, 1995); 141 Cong. Rec. H14038 (Rep. Cox) ("What
we are seeking to do here is to protect investors so
that they are in charge of these kind of lawsuits."),
H14039 (Rep. Bliley) ("[bill] puts control of class
action lawsuits back in the hands of the real
shareholders, where it belongs."), H14048 (Rep. Harman)
("[bill] before us ends abusive practices and restores
investor control over lawsuits."), H14050 (Rep.
Deutsch) ("This bill will restore power to real
investors in securities lawsuits, changing the rules so
that actual investors, not predatory lawyers call the
shots.") (Dec. 6, 1995); 141 Cong. Rec. S19054 (Sen.
Hatch), S19084 (Sen. Reid) ("Defrauded investors are
not adequately compensated because attorneys, not
investors, control these class actions.") (Dec. 21,
1995).
======END OF PAGE 7======
interests are more strongly aligned with the class of shareholders, will
participate in the litigation and exercise control over the selection and
actions of plaintiff's counsel." Id.
In particular, Congress "intend[ed] that the lead plaintiff provision
will encourage institutional investors to take a more active role in
securities class action lawsuits." Id. at 34. Congress "believe[d] that
increasing the role of institutional investors in class actions will
ultimately benefit shareholders and assist courts by improving the quality
of representation in securities class actions." Id.
C. Facts
Thirteen class action suits are pending in this Court against Vesta
Insurance Group, a Birmingham, Alabama holding company for a group of
property/casualty insurance companies, and certain of its officers and
directors. The suits were brought by shareholders who purchased Vesta
stock during various Class Periods from June 1, 1995 through June 30, 1998.
The suits are based upon Vesta's restatement of its earnings by some $65
million dollars due to "accounting irregularities" and "correction" of its
accounting methods. Defendants have filed unopposed motions to consolidate
the cases before this Court.
Four competing members or collections of members of the plaintiff
class originally moved to be appointed lead plaintiff in these cases: (a)
the Florida Board; (b) the "LaPerriere Group," consisting of 22 individuals
and two entities, which sought appointment as lead plaintiff of all of its
members, or, in the alternative, of its five members with the most losses;
(c) the "Gold Group," consisting of Trust Insurance Company and two
individuals; and (d) the "Anderson Group" of three individuals.
======END OF PAGE 8======
In their Joint Memorandum dated August 25, 1998, the LaPerriere Group
and the Gold Group informed the Court that they, along with two new
individual plaintiffs, had formed the "Vesta Plaintiffs Group." The Vesta
Plaintiffs Group sought appointment as lead plaintiff of all of its members
or, in the alternative, the nine members with the most losses. During the
August 28, 1998 hearing, counsel for the Vesta Plaintiffs Group announced
an agreement with counsel for the Anderson Group to the effect that the
Anderson Group would join the Vesta Plaintiffs Group. Tr. 41. The Vesta
Plaintiffs Group is represented by more than two dozen separate law firms.
See Jt. Mem. 1 n.1, 4-8.
The Commission understands that the Vesta Plaintiffs Group claims
losses of over $400,000 and that the Florida Board claims losses of
approximately $300,000. See, e.g., Tr. 42.
ARGUMENT
The LaPerriere Group originally requested approval of
two law firms as "co-lead counsel." LaP. Mem. 14.
When it joined the Gold Group, the LaPerriere Group
increased, without explanation, the number of proposed
"co-lead counsel" to three firms. Jt. Mem. 22. At the
August 28 hearing, the new "Group" added the Anderson
Group to its ranks without discussing the lead counsel
issue. Tr. 41.
With regard to the largest financial interest
requirement, the Commission has used the calculations
provided in the August 24, 1998 Affidavit of Michael A.
Marek ("Marek Aff."), submitted with Bd. Supp. Mem. and
not contested by the Vesta Plaintiffs Group. The
Commission understands that the Florida Board intends
to file a supplemental affidavit representing that, due
to the continued decline in Vesta's stock price, the
Board's losses under 15 U.S.C. 78u-4(e) have increased
to more than $550,000, compared to the Vesta Plaintiffs
Group's losses of $475,000. Because such an affidavit
is not yet on file and because the Vesta Plaintiffs
Group has not had an opportunity to respond to it, the
Commission does not rely on it here.
======END OF PAGE 9======
I. THE COMMISSION IS NOT AWARE OF ANY REASON THE ACTIONS SHOULD NOT BE
CONSOLIDATED, NOR OF ANY LIMITATION THAT SHOULD BE PLACED ON
CONSOLIDATION.
At the outset, the Commission notes that the Litigation Reform Act
refers to consolidation only when it provides that if more than one
securities fraud action "on behalf of a class asserting substantially the
same claim or claims" has been filed, then appointment of the lead
plaintiff should await resolution of a motion to consolidate. 15 U.S.C.
78u-4(a)(3)(A)(ii). The Act does not displace the traditional legal
standards for consolidation. See Fed. R. Civ. P. 42(a); Hendrix v.
Raybestos-Manhattan, Inc., 776 F.2d 1492, 1495-97 (11th Cir. 1985).
The Commission understands that none of the parties objects to
consolidation of these actions. See Tr. 35-36. The Court stated its
belief at the hearing that "all 13 cases are strikingly similar in * * *
various material respects." Tr. 25.
Neither in the briefing nor at the hearing has any party raised any
significant distinguishing characteristics among the actions, such as, for
example, the existence of "stock" plaintiffs and "options" plaintiffs,
which prompted one magistrate judge to consolidate a number of actions
"into two actions, one on behalf of the Stock Plaintiffs, and the other on
behalf of the Options Plaintiffs." Chill v. Green Tree Financial Corp.,
No. 97-2666 (JRT/RLE), 1998 WL 420557, *3-*6 (D. Minn. June 29, 1998).
The Commission agrees with the Vesta Plaintiffs Group and the Florida
Board that denial of consolidation would not obviate the need to resolve
the lead plaintiff motions. See Tr. 15-16, 35-36. The lead plaintiff
provisions are designed to bring the existence of a securities class action
to the attention of other members of the class and to give them the
======END OF PAGE 10======
opportunity to move to be appointed lead plaintiff even if they did not
file the action. See 15 U.S.C. 78u-4(a)(3)(A) ("Early Notice to Class
Members") & (a)(3)(B)(iii)(I)(aa) (requirement that lead plaintiff
applicant "has either filed the complaint or made a motion in response to a
notice") (emphasis added). Thus, even if the Court were to deny
consolidation and stay all but the first-filed action (see Tr. 15), the
lead plaintiff motions would still need to be decided in the first-filed
action. Accordingly, the Commission is not aware of any reason that the
actions should not be consolidated or any restrictions that should be
placed on consolidation.
II. THE COMMISSION BELIEVES THAT THE FLORIDA BOARD PRESUMPTIVELY IS THE
MOST ADEQUATE PLAINTIFF, SUBJECT TO REBUTTAL OF THE PRESUMPTION IN
ACCORDANCE WITH THE LANGUAGE AND PURPOSES OF THE LITIGATION REFORM
ACT.
The Litigation Reform Act provides that "the court shall adopt a
presumption that the most adequate plaintiff" is the "person or group of
persons" that satisfies three requirements: (1) "has either filed a
complaint or made a motion [for appointment as lead plaintiff]"; (2) "has
the largest financial interest in the relief sought by the class"; and (3)
"otherwise satisfies the requirements of Rule 23." 15 U.S.C. 78u-
4(a)(3)(B)(iii)(I). The presumption "may be rebutted only upon proof" that
the presumptively most adequate plaintiff "will not fairly and adequately
protect the interests of the class" or "is subject to unique defenses that
render such plaintiff incapable of adequately representing the class." 15
U.S.C. 78u-4(a)(3)(B)(iii)(II)(aa) & (bb). The Florida Board and the Vesta
Plaintiffs Group each claim to have the largest financial interest.
Alternatively, each argues that if the other is found to have the largest
financial interest, the statutory presumption should not operate in favor
======END OF PAGE 11======
of the other because the other will not fairly and adequately protect the
class' interests.
A. The Florida Board Has the Largest Financial Interest in the
Litigation, Once the "Vesta Plaintiffs Group" Is Limited to a
Size That Would Enable It To Manage the Litigation and the
Lawyers Effectively.
The Vesta Plaintiffs Group claims to have the largest financial
interest in the litigation. It claims losses of at least $400,000, more
than the $300,000 in losses alleged by the Florida Board. The Commission
believes, however, that the Court should first determine whether the
members of the Vesta Plaintiffs Group are too numerous to manage the
litigation effectively. If the Court determines -- as the Commission
believes that it should -- to reduce their number to a manageable size, it
should only consider, in calculating the financial interest of the "Vesta
Plaintiffs Group," the interest of those members that remain. See 15
U.S.C. 78u-4(a)(3)(B)(iii)(I).
While the Litigation Reform Act states that the lead plaintiff may be
a "group of persons," this does not mean that the Court must accept as a
"group" any number and assortment of persons proposed. Yet, that is
essentially what the Vesta Plaintiffs Group contends. See Tr. 44 (its
counsel asserts that "group" is "clearly intended to be its common,
This argument appears to be made under two provisions
of the Litigation Reform Act: that the lead plaintiff
"satisf[y] the requirements of Rule 23 of the Federal
Rules of Civil Procedure," and that the presumption as
to who should be lead plaintiff can be rebutted by
proof that the presumptive lead plaintiff "will not
fairly and adequately protect the interests of the
class." See 15 U.S.C. 78u-4(a)(3)(B)(iii)(I)(cc) &
(a)(3)(B)(iii)(II).
======END OF PAGE 12======
accepted meaning, which is a group of people who have gotten together to
aggregate their damages to prosecute the case").
The statutory language "group of persons" appears in the provision of
the Litigation Reform Act establishing a presumption that a certain type of
plaintiff is the "most adequate plaintiff" to lead a securities fraud class
action. 15 U.S.C. 78u-4(a)(3)(B)(iii)(I). As discussed above, Congress
intended by that provision to protect plaintiff investors by making
securities litigation less of a "lawyer-driven" enterprise. The
presumption is intended to give control of the litigation to lead
plaintiffs -- and particularly to institutional investors -- who have a
substantial stake in the litigation, and thus the ability and incentive to
control the lawyers. See, e.g., Gluck v. Cellstar Corp., 976 F. Supp. 542,
548 (N.D. Tex. 1997) ("The legislative history of the Reform Act is replete
with statements of Congress' desire to put control of such litigation in
the hands of large, institutional investors."); Greebel v. FTP Software,
Inc., 939 F. Supp. 57, 63-64 (D. Mass. 1996) (same); Ravens v. Iftikar,
1997 WL 405110, *6 (N.D. Cal. July 16, 1997) ("The Reform Act affords
large, sophisticated institutional investors a preferred position in
securities class actions. * * * Congress sought to eliminate figurehead
plaintiffs who exercise no meaningful supervision of litigation."); Chan v.
Orthologic Corp., No. CIV 96-1514 PHX RCB, slip op. at 11 (D. Ariz. Dec.
19, 1996) (Act "was designed to encourage the participation of
institutional investors in securities class action litigation"); pp. 4-8,
supra.
As explained in a law review article cited in the Act's legislative
history as "provid[ing] the basis for the `most adequate plaintiff
======END OF PAGE 13======
provision," S. Rep. 11 n.32, "[i]nstitutions' large stakes give them an
incentive to monitor, and institutions have or readily could develop the
expertise necessary to assess whether plaintiffs' attorneys are acting as
faithful champions for the plaintiff class." Elliott J. Weiss & John S.
Beckerman, Let the Money Do the Monitoring: How Institutional Investors Can
Reduce Agency Costs in Securities Class Actions, 104 Yale L.J. 2053, 2095
(1995) ("Weiss & Beckerman"). The authors further argue that institutions
can obtain more favorable settlements, and should be "in a position to
negotiate fee arrangements with plaintiffs' lawyers before class actions
are initiated[,] * * * [which] may well * * * differ substantially from the
fee structures that courts currently employ." Id. at 2107, 2121.
As noted in In re California Micro Devices Sec. Litig., 168 F.R.D.
257, 275 (N.D. Cal. 1996), a non-Litigation Reform Act case, institutional
investors "will be willing and able to monitor[] attorney conduct in
securities class actions much more rigorously than either figurehead
plaintiffs or courts can do." The court explained that:
Institutional investors have financial interests in the
outcome of securities class actions which dwarf the
interests of individual plaintiffs, and with this
increased financial interest comes an increased
incentive to monitor class counsel's conduct of the
action. Institutional investors, moreover, are much
better situated to conduct such monitoring, both
because they have greater resources and because, as
repeat players in the securities class actions, they
are experienced in the issues which these actions
inevitably raise.
Id.; see 965 F. Supp. 1327, 1330-32 (N.D. Cal. 1997) (same case); City
Nominees, Ltd. v. Macromedia, Inc., No. C97-3521-SC, slip op. at 2 (N.D.
Cal. Jan. 23, 1998) ("As courts have noted, large institutional investors
have proven to be more efficient plaintiffs than unrelated plaintiffs
======END OF PAGE 14======
grouped together, producing larger recoveries with smaller attorney's fees
than individual plaintiffs."). The Commission has noted in other contexts
that institutions have skills and expertise that are likely to be very
valuable to investors, and are likely to devote substantial time and
resources to representing investors in litigation.
This is not to suggest that an institutional investor must or should
always be chosen as lead plaintiff. But it does strongly suggest that if a
"group of persons" is to serve as lead plaintiff, the group should have
comparable ability to give effect to the statutory objective of client
control of the litigation and the lawyers. See Conf. Rep. 34
("Institutional investors and other class members with large amounts at
stake will represent the interests of the plaintiff class more effectively
than class members with small amounts at stake.").
For example, the Commission has advised bankruptcy
courts that institutional investors, while serving on
creditors' committees, should be allowed to engage in
trading in the securities of debtors, subject to
certain restrictions designed to prevent trading on
material nonpublic information. The Commission has
noted that entities such as investment advisers,
broker-dealers, pension funds, banks, and insurance
companies "have skills and expertise that are likely to
be extremely valuable to the [creditors'] committee,"
and that "[b]ecause such entities frequently have a
substantial financial interest in the outcome of
bankruptcy proceedings and can thus be expected to
devote significant time and resources to the official
committee's activities," discouraging participation in
the committee by such institutions by totally
disallowing trading "would be contrary to the best
interests of public investors." Memorandum of
Securities and Exchange Commission in Support of Motion
for an Order Permitting Securities Trading in Certain
Circumstances, filed in In re WRT Energy Corp., No. 96-
BK-5012 (Bankr. W.D. La. May 6, 1996) at 2, 4.
======END OF PAGE 15======
The mere fact that a proposed lead plaintiff "group" might have the
largest combined financial stake does not guarantee this result. To the
contrary, it will ordinarily be the case that a large number of previously
unaffiliated persons will be far from able to act collectively to manage
the litigation and control the lawyers. If members of the proposed "group"
individually have relatively small losses in the case and do not know each
other they will tend to lack either the incentive or ability to act in
concert. The problem is made worse if the members have been recruited by
counsel. The net result will be that while the "group" nominally
has a large stake in the litigation, the lawyers will dominate
decisionmaking.
The Commission believes that the term "group of persons" should be
construed in light of these statutory purposes, and that the Court
generally should only approve a group that is small enough to be capable of
effectively managing the litigation and the lawyers. Ordinarily, this
should be no more than three to five persons, a number that will facilitate
joint decisionmaking and also help to assure that each member of the group
has a sufficiently large stake in the litigation. There may, of course, be
In its report last year on the first year of practice
under the Act, the Commission stated that some lawyers,
"[t]aking advantage of [the] provision" of the Act
allowing the appointment as lead plaintiff of a "group
of persons," have attempted in the process of applying
for lead plaintiff "to recruit investors as additional
clients." Securities and Exchange Commission, Report
to the President and the Congress on the First Year of
Practice Under the Private Securities Litigation Reform
Act of 1995 65 (Apr. 1997) ("SEC Report").
Specifically, some lawyers have "phrased [notices to
the class under the Act] in a way more likely to
attract clients, rather than competition from investors
(and other law firms) independently vying to be named
lead plaintiff." Id. at 65-66.
======END OF PAGE 16======
unusual circumstances that warrant departure from these limits. Such
circumstances might include pre-existing relationships among the group
members or other factors indicating that they have a special capacity to
provide able and unified decisionmaking independent of counsel. Each
proposed member of the "group" should be evaluated separately, and the
marginal benefit of including another member in the group weighed against
the further division of decisionmaking authority and the attendant problems
that enlargement of the group entails. In general, except in unusual
circumstances, to ensure adequate monitoring, coordination, and
accountability, a "group" should have no more than five members, and the
fewer the better.
Several courts have endorsed these principles. In In re Donnkenny
Inc. Sec. Litig., 171 F.R.D. 156, 157-58 (S.D.N.Y. 1997), the court
rejected a proposed lead plaintiff "group" consisting of "two unrelated
institutional investors and four other individual class members." The
"group" was formed from two previously competing lead plaintiff movants,
and included an institution with nearly $2 million more in losses than any
other member. The court found that the movants had not justified
appointment of a "group," id. at 158, and appointed as lead plaintiff the
"person" -- the institution -- with far and away the largest financial
The law review article cited in the legislative history
as "provid[ing] the basis for the `most adequate
plaintiff' provision," S. Rep. at 11 n.32, suggests
that Congress used the "group of persons" language
because "if several institutions were interested in
becoming involved, they could either compete to become
lead plaintiff or agree to work together." Weiss &
Beckerman, 104 Yale L.J. at 2108.
======END OF PAGE 17======
interest in the litigation. The Donnkenny court explained its rejection of
the proposed "group" as follows:
To allow an aggregation of unrelated plaintiffs to
serve as lead plaintiffs defeats the purpose of
choosing a lead plaintiff. One of the principal
legislative purposes of the [Litigation Reform Act] was
to prevent lawyer-driven litigation. Appointing lead
plaintiff on the basis of financial interest * * * was
intended to ensure that institutional plaintiffs with
expertise in the securities market and real financial
interests in the integrity of the market would control
the litigation, not lawyers. To allow lawyers to
designate unrelated plaintiffs as a "group" and
aggregate their financial stakes would allow and
encourage lawyers to direct the litigation. Congress
hoped that the lead plaintiff would seek the lawyers,
rather than having the lawyers seek the lead plaintiff.
Id. at 157 (citation omitted).
In In re Oxford Health Plans, Inc. Sec. Litig., No. MDL-1222, 1998 WL
400741, *4 (S.D.N.Y. July 15, 1998), the court limited a proposed 30-member
lead plaintiff "group" to its three members with the most losses, "each of
whom has suffered from two to three million dollars in losses." The court
stated that "the limited size of the Vogel Group coupled with the scope of
each individual's loss will make the Vogel Group, as reduced by the Court,
an effective monitor of its counsels' performance, thereby fulfilling the
purpose of the [Litigation Reform Act]." Id.
In City Nominees v. Macromedia, No. C97-3521-SC, slip op. at 2, the
court noted that "one purpose of the [Act] was to reduce the tremendous
influence that the plaintiff's bar had over securities class action
lawsuits." According to the court, "the legislative history discusses the
need to limit the number of plaintiffs in order to improve the monitoring
of the attorneys." Id. at 6. The court held that the "appointment of 36
lead plaintiffs is inconsistent with the goal of restoring the control of
======END OF PAGE 18======
lawsuits to plaintiffs. 36 lead plaintiffs would make the administration
of this complex civil action even more complex." Id. at 7. Noting that
"counsel has presented no rationale for the breadth of the proposed group,"
the court accepted an alternative proposal of 6 persons as lead plaintiff
as "not the ideal outcome envisioned by the framers of the [Act]," a
"permissible, but suboptimal, result." Id. at 6, 7. See In re
Graham-Field Health Products Litig., No. 98-CV-19:3 (DRH), slip op. at 3, 4
(E.D.N.Y. Aug. 10, 1998) (declining to approve unopposed motion of 50
parties to be appointed lead plaintiff because "there is a significant
question as to whether it is appropriate to appoint such a large group as
lead plaintiff" and "it may well be that to appoint such a large lead
plaintiff group would be to defeat the [Act's] purpose"); In re Informix
Corp. Sec. Litig., No. C-97-1289-SBA, slip op. at 6 (N.D. Cal. Oct. 17,
1997) (rejecting a large proposed lead plaintiff "group," stating that it
"would not be able to have the type of meaningful participation in the
conduct of the litigation which was one of the guiding purposes of the lead
plaintiff provisions * * * . Appointment of a select group of investors
with significant losses would fulfill the statutory goal of having
The Macromedia court was troubled by "some tension
between the stated purpose of the [Act] and its
statutory language." The Commission believes this
appearance of "tension" was created by the fact that
the court did not pursue its analysis of the language
"group of persons" beyond the general observation that
the Act permits appointment of more than one person.
See slip op. at 6-7. Because the lead plaintiff motion
was unopposed, the court did not have the benefit of an
adversarial presentation on the issue.
======END OF PAGE 19======
plaintiffs who suffered significant losses control the
litigation.").
Applying these principles to the proposed "Vesta Plaintiffs Group,"
the Commission notes that three members have alleged losses in excess of
$50,000: Randy Seckman & Associates, $87,000; Trust Insurance Company,
$64,000; and Mr. Sullivan, $52,000. See LaP. Mem., Ex. 2; Marek Aff.,
supra n.6. The remaining members have individual losses of $16,000 or
less. Id. The Vesta Plaintiffs Group provides no justification under the
Litigation Reform Act for enlarging the "group" beyond the three members
with the most losses. There appear to be no pre-existing relationships
among its members. Indeed, they filed separate actions, separate lead
plaintiff motions, and are represented by two dozen separate counsel. The
Vesta Plaintiffs Group has not specified the manner in which their "group"
was formed; described its members in any detail; or explained how they
would function collectively. Nor has it provided any basis for its
original proposal of a five-member subgroup, its amended proposal of a
nine-member subgroup, or the change from the one to the other.
Accordingly, the Commission believes that, at a minimum, the Court
should limit the number of persons in the proposed "Vesta Plaintiffs Group"
to no more than Randy Seckman & Associates, Trust Insurance Company, and
Mr. Sullivan. Once the "Vesta Plaintiffs Group" is limited in this manner,
it has combined losses of about $200,000, which is less than the Florida
In Informix, counsel for the large "group" proposed a
nine-person alternative, which the court accepted. The
court's analysis of the alternative proposal is not set
forth in its opinion, which, because the lead plaintiff
motion in that case was unopposed, was rendered without
the benefit of an adversarial presentation.
======END OF PAGE 20======
Board's $300,000 in losses. Thus, the Florida Board has "the largest
financial interest in the relief sought by the class."
The Vesta Plaintiffs Group's arguments in favor of its proposed lead
plaintiff "group" -- whether based on statutory language, case law, or
policy -- do not withstand scrutiny.
The Vesta Plaintiffs Group cites the statutory language "group of
persons" repeatedly for the proposition that a "group" may be appointed
lead plaintiff (Jt. Mem. 4, 6, 7, 9; Jt. Resp. 3), but never provides a
meaningful explanation of what a "group" is. It claims that the lead
plaintiff provisions do not define "group" and that "[w]hen Congress wants
to define the term `group' in some restrictive way, they know how to do so"
(Tr. 43). It cites Exchange Act Section 13(d), 15 U.S.C. 78m(d), which,
speaking generally, requires disclosure to the market when a "person"
acquires more than a specified percentage of certain securities. Section
13(d)(3), 15 U.S.C. 78m(d)(3), specifies that "[w]hen two or more persons
act as a partnership, limited partnership, syndicate, or other group for
In discussing the largest financial interest
requirement, some courts have referred to other
factors, such as the number of shares purchased by the
lead plaintiff applicants. See Bd. Supp. Mem. 12-13.
We do not believe that consideration of such factors is
generally appropriate given the language and purposes
of the Act. The Act requires the Court to look to who
has "the largest financial interest in the relief
sought by the class," not to who has the largest stake
in the defendant. In theory, one plaintiff might have
purchased more shares than another, but because they
bought or sold at a different time, suffered fewer
losses. That person presumptively would be a less
appropriate lead plaintiff than a person who bought
fewer shares, but who suffered greater losses and who
thus has more to recover and a greater incentive to
monitor and control the litigation.
======END OF PAGE 21======
the purpose of acquiring, holding, or disposing" of the specified
securities, they shall be considered a "person" under the section.
But Section 13(d)(3) does not define the word "group"; it merely uses
that word in a sentence defining "`person' for the purposes of this
subsection." In Section 13(d)(3), as in the lead plaintiff provisions, the
meaning of "group" is determined by its context and purpose. The purpose
of Section 13(d) is to provide disclosure to the market of certain levels
of securities transactions. It makes sense in that context for a "group"
to include all persons acting in concert. The statutory objectives that
call for limiting a "group" in the context of the lead plaintiff provisions
do not exist under Section 13(d).
The Vesta Plaintiffs Group also cites cases for the general
proposition that "individual plaintiffs may aggregate their losses in order
to serve" as a lead plaintiff "group." See LaP. Mem. at 10; see also Jt.
Mem. at 4, 6-7. But none of these cases holds that a "group" can be of
unlimited size and indiscriminate composition. Most contain little or no
analysis of the "aggregation" issue; indeed, the issue does not appear to
have been contested, briefed, or argued in the cases, rendering them of
little or no precedential value on the issue.
See Greebel v. FTP Software, Inc., 939 F. Supp. 57, 64
(D. Mass. 1996) (granting unopposed motion of three
persons to be lead plaintiff without analysis of
aggregation issue); Lax v. First Merchants Acceptance
Corp., No. 97 C 2715, 1997 WL 461036, *5 (N.D. Ill.
Aug. 11, 1997) (appointing as lead plaintiff one
coalition of plaintiffs over competing coalition
without analysis of aggregation); Zuckerman v. Foxmeyer
Health Corp., No. 3:96-CV-2258-T, 1997 WL 314422, *2
(N.D. Tex. Mar. 28, 1997) (appointing 11 persons as
lead plaintiff over defendant's objection to
appointment of multiple lead counsel; no analysis of
(continued...)
======END OF PAGE 22======
The only cases the Vesta Plaintiffs Group cites that contain any
extended discussion of the aggregation issue are Magistrate Judge
Erickson's rulings in D'Hondt v. Digi Int'l Inc., 1997 WL 405668, *3 (D.
Minn. Apr. 3, 1997) and in Chill v. Green Tree Financial Corp., No. 97-2666
(JRT/RLE), 1998 WL 420557 (D. Minn. June 29, 1998). Both cases acknowledge
"Congress' goal that the Lead Plaintiffs, and not their counsel, will
control the progress and proper disposition of their legal claims" and
express the desire "that the will of Congress, as expressed in the [Act],
will be effectuated in the conduct of this litigation." Chill, 1998 WL
420557, *12; D'Hondt, 1997 WL 405668, *5.
Chill appears to be generally consistent with the result urged here.
There, the magistrate judge appointed a six-person "smaller subset" of a
proposed lead plaintiff "group," stating, "[w]e do not suggest that either
Rule 23, or the [Litigation Reform Act], warrants an arbitrary limit on the
number of proposed Lead Plaintiffs, for we only hold that, in a case-by-
(...continued)
aggregation); In re Cephalon Sec. Litig., No. CIV A 96-
0633, 1996 WL 515203 (E.D. Pa. Aug. 27, 1996) (same as
Greebel; one-page memorandum and order); In re Ride,
Inc. Sec. Litig., Master File No. C97-402WD, Order at 3
(W.D. Wash. Aug. 5, 1997) (same as Lax); Bobrow v.
MobileMedia, Inc., No. 96-4715 (D.N.J. Mar. 31, 1997)
(letter opinion summarily rejecting one plaintiff
coalition's argument that it had larger financial
interest than another because it included the person
with more shares than anyone else); Chan v. Orthologic
Corp., No. CIV 96-1514 PHX RCB, slip op. at 4-5 (D.
Ariz. Dec. 19, 1996) (same as Lax); Powers v. Eichen,
No. 96-1431-B (AJB) (S.D. Cal. Nov. 15, 1996) (order
devoid of analysis). The courts in In re Read-Rite
Corp. Sec. Litig., No. C-97-20059 RMW (N.D. Cal. May
28, 1997) and In re Diamond Multimedia Sys., Inc. Sec.
Litig., No. C 96-2644 SBA (N.D. Cal. Jan. 13, 1997),
discuss the aggregation issue only briefly and without
detailed analysis of the lead plaintiff proposals in
those cases.
======END OF PAGE 23======
case inquiry, a rule of reason prevails." 1998 WL 420557, *7. The
Commission is not suggesting an "arbitrary" limit on the size of the group,
but rather an approach that is informed by the language and purposes of the
Litigation Reform Act.
In D'Hondt, 1997 WL 405668, *3, Magistrate Judge Erickson appointed 21
persons as lead plaintiff over defendants' objections, stating that while
it might be argued that a large lead plaintiff coalition would dilute the
plaintiffs' control over the action, "an equally cogent assertion can be
broached that, when more greatly numbered, the Lead Plaintiffs can more
effectively withstand any supposed effort by the class counsel to seize
control of the class claims." We respectfully suggest that in ordinary
circumstances this will not be true. This is not a contest in which
numerosity is an asset. We believe that a small number of well-motivated,
financially interested plaintiffs will be far more willing and able to
control counsel than will a large, dispersed coalition of persons who each
have only a modest stake in the outcome of the litigation.
Although the Vesta Plaintiffs Group relies heavily on policy
arguments, it fails to come to terms with Congress' clear policy judgment
that a lead plaintiff in a securities fraud class action should have
effective control of the litigation and the lawyers. See Tr. 45 ("so-
called lawyer-driven litigation, whatever that is," the Vesta Plaintiffs
Group's counsel remarked). When the Court raised this issue, the Vesta
Plaintiffs Group's counsel attempted to define the objectives of the Act in
terms of "better filed complaints, better prosecuted cases." Tr. 71.
======END OF PAGE 24======
Counsel neglected to mention that Congress believed that those benefits
flow from client control. See pp. 4-8, supra.
The Vesta Plaintiffs Group instead attempts to justify its lead
plaintiff motion on grounds that have no support in the language or history
of the lead plaintiff provisions. It asserts that their "group" was formed
"in an effort to ensure the broadest * * * representation of the class"
(Jt. Mem. 1-2), a "diversified combination" (Jt. Mem. 2), a "diverse group"
(Jt. Mem. 2 n.1), a "balanced combination" capable of representing "the
diverse interests" of the class (Jt. Mem. 3), a "diverse, balanced group of
class members" (Jt. Mem. 10), a "balanced mix of individual and
institutional plaintiffs" (Jt. Mem. 11), and a "broader cross section of
the Class, provid[ing] fuller representation," than the Florida Board
(id.). Asserting that there is "strength in the group" and "in numbers"
(Tr. 57, 76), that "one plaintiff may have a defect and another one won't"
(Tr. 57), and that the Court should "avoid the danger of appointing a
single Lead Plaintiff and Lead Counsel with significant defects" (Jt. Mem.
11), it appears to urge the Court to adopt a presumption in favor of more
rather than fewer class representatives. See id. at 11 ("multiple class
representative could more easily rebut an argument of lack of typicality or
adequacy than a single class representative"), 12. It also urges the Court
to choose between competing lead plaintiff movants on the basis of the
number of institutional investors claimed by each, regardless of those
The Vesta Plaintiffs Group also argues that the
Litigation Reform Act "was predominantly an attempt to
limit participation of `professional plaintiffs.'" Jt.
Mem. 20. In fact, Congress enacted separate provisions
specifically addressed to the "professional plaintiff"
problem. See 15 U.S.C. 78u-4(a)(3)(vi) ("Restrictions
on Professional Plaintiffs").
======END OF PAGE 25======
institutions' respective financial interests in the litigation (Tr. 57).
The Vesta Plaintiffs Group further argues that its members' individual
losses are greater "[a]s a percentage of their total investment in Vesta"
and as a percentage of their total assets than the Florida Board's losses,
which it contends are "miniscule." Jt. Mem. 5.
These arguments ignore the fact that Congress adopted the largest
financial interest requirement because it believed that large investors are
best able to manage the litigation and the lawyers, that effective client
control benefits all class members, and that large investors can adequately
represent the interests of small investors. That requirement is framed in
terms of the "largest financial interest in the relief sought by the
class," not in terms of loss as a percentage of net worth. See In re
Cendant Corp., No. 98-CV-1664 (WHW), 1998 WL 598337, *4 (D.N.J. Sept. 8,
1998). The Vesta Plaintiffs Group cites no basis in the statutory language
or legislative history for preferring a "group," large or small, to a
"person," or for considering "diversity of representation." In fact, in
adopting the largest financial interest requirement, Congress rejected the
very objections raised by the Vesta Plaintiffs Group that it was
unrepresentative of the class. See, e.g., Conf. Rep. 34.
At the hearing, Vesta Plaintiffs Group's counsel
suggested other policy rationales that are open-ended,
not subject to effective judicial administration, and
inconsistent with the policy choices specified by
Congress: "What would be fair? What would be
efficient? How could the cases get advanced? How
could it get resolved? Where can we avoid delaying and
where can we avoid court?" Tr. 76.
In construing the notice provisions of the Litigation
Reform Act, the court in Greebel v. FTP Software, Inc.,
939 F. Supp. 57, 63-64 (D. Mass. 1996) (citations
(continued...)
======END OF PAGE 26======
Finally, as discussed further below, the statutory presumption may be
rebutted "only upon proof" that the presumptively most adequate plaintiff
"will not" fairly and adequately represent the interests of the class. 15
U.S.C. 78u-4(a)(3)(B)(iii)(II). The Vesta Plaintiffs Group's arguments
based on "avoid[ing] the danger" that a court might appoint a lead
plaintiff "with significant defects," or that "one plaintiff may have a
defect and another one won't," seem to assume, rather than prove, the
existence of such defects.
B. The Court Should Be Guided by the Language and Purposes of the
Litigation Reform Act in Deciding Whether the Vesta Plaintiffs
Group Has Met Its Burden of Proving That the Florida Board Will
Not Fairly and Adequately Protect the Interests of the Class.
The Vesta Plaintiffs Group argues that the Florida Board is not the
most adequate plaintiff because it will not adequately represent the class.
Jt. Mem. 16-22. The Commission recognizes the importance of the adequacy
of representation determination under the Litigation Reform Act to investor
(...continued)
omitted), stated:
* * * Congress' purpose was not to ensure
notice to the entire class, but merely to
those sophisticated and institutional
investors that Congress deemed presumptively
most adequate to serve as lead plaintiffs in
securities class actions. * * * The only
contrary piece of legislative history
advanced by FTP is an isolated statement made
by Senator Boxer on the Senate floor as she
argued in favor of the proposed Boxer-
Bingaman Amendment * * * [that] would have
excised the statutory provisions tilting
appointment of a lead plaintiff toward large
investors and, in its place, allow the entire
class of investors to vote on who should
serve as lead plaintiff. The amendment did
not carry.
======END OF PAGE 27======
protection. The Commission also recognizes, however, that the
determination is fact-intensive, committed to the sound discretion of the
court, and not easily addressed by an amicus curiae, which, by its very
nature, is not as familiar with, and involved in, the case as are the
parties and the court. While we are unable to express an opinion on the
ultimate question, the Commission nevertheless respectfully suggests ways
in which the language and purposes of the Litigation Reform Act inform the
adequacy determination.
The Act establishes specific standards for an adequacy challenge. In
relevant part, the Act provides that the presumption in favor of the most
adequate plaintiff "may be rebutted only upon proof by a member of the
purported plaintiff class that the presumptively most adequate plaintiff *
* * will not fairly and adequately protect the interests of the class." 15
U.S.C. 78u-4(a)(3)(B)(iii)(II) (emphasis added). Thus, mere speculative
allegations of inadequacy are not sufficient. As one court noted,
"speculative assertions are insufficient to rebut the presumption that [a
lead plaintiff movant] is the most adequate plaintiff. The statute
requires the [challenger] to present `proof' of its assertions; or, if it
requires discovery to gather such proof, to `demonstrate a reasonable
basis' for a finding of inadequacy." Gluck, 976 F. Supp. at 547-48 (citing
15 U.S.C. 78u-4(a)(3)(B)(iii)(II) & (a)(3)(B)(iv)).
Furthermore, the standards for an adequacy challenge must be viewed in
the context of the lead plaintiff provisions as a whole. See Greebel, 939
F. Supp. at 63-64 (interpreting Reform Act notice provision in conjunction
with largest financial interest requirement because a "statutory provision
should be read by reference to the whole act"), citing John Hancock Mut.
======END OF PAGE 28======
Life Ins. Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 94-95 (1993);
Ravens, 1997 WL 405110, *6 (same). The largest financial interest
requirement was itself designed to ensure more effective representation of
investors in securities fraud class actions. Congress sought to encourage
large investors, including institutions, to serve as lead plaintiffs, and
believed that institutions could and would qualify as lead
plaintiffs. The Commission believes that the standards for an
adequacy challenge must not be read and applied in such a manner that they
would nullify the largest financial interest requirement and defeat the
purposes of the lead plaintiff provisions.
Thus, courts have recognized that generic arguments that would
systematically disqualify large investors and institutions from serving as
lead plaintiff should not suffice as "proof" under the statute. See, e.g.,
Gluck v. Cellstar Corp., 976 F. Supp. 542, 547-48 (N.D. Tex. 1997); Chan v.
Orthologic Corp., No. CIV 96-1514 PHX RCB, slip op. at 8-12 (D. Ariz. Dec.
19, 1996). The Vesta Plaintiffs Group raises a number of arguments that
appear to be of this type. For example, to the extent that it is arguing
that the Florida Board is an inadequate representative because the Board's
The Vesta Plaintiffs Group's argument that the Florida
Board "is clearly not the type of lead plaintiff
contemplated by Congress" because it has "filed at
least 6 additional securities actions in the last 12
months" is not well taken. See Jt. Mem. 20, citing 15
U.S.C. 78u-4(a)(3)(B)(vi) ("Except as the court may
otherwise permit, consistent with the purposes of this
section, a person may be a lead plaintiff * * * in no
more than 5 securities class actions * * * during any
3-year period."). The legislative history makes clear
that "[i]nstitutional investors seeking to serve as
lead plaintiff may need to exceed this limitation and
do not represent the type of professional plaintiff
this legislation seeks to restrict." Conf. Rep. 35.
======END OF PAGE 29======
assets far exceed the Board's losses in this case (see, e.g., Tr. 51),
Congress was well aware that institutional investors have millions or
billions of dollars of assets under management and that these amounts
easily could dwarf losses in particular cases. See, e.g., Conf. Rep. 34
(noting that "[i]nstitutional investors are America's largest shareholders,
with about $9.5 trillion in assets, accounting for 51% of the equity
market" and that "pension funds account[ ] for $4.5 trillion [ ] or nearly
half of institutional assets").
Similarly, the Vesta Plaintiffs Group argues that the Board may be
placed in an "awkward situation" because Morgan Stanley Dean Witter, a
financial advisor to some of the funds administered by the Board, "may
become" a defendant in this case. Jt. Mem. 18-19; Tr. 51-52. But the mere
fact of a plaintiff's business relationship with a potential defendant does
not establish a per se category or suffice as "proof" of inadequacy.
The conflicts alleged by the Vesta Plaintiffs Group are further
attenuated by the fact that, in contrast to In re Cendant Corp., No. 98-CV-
1664 (WHW), Hrg. Tr. at 16 (D.N.J. Aug. 24, 1998), no plaintiff in this
action has named the entities allegedly creating the conflict (Torchmark,
Merrill Lynch, Morgan Stanley) as defendants in this action. See Tr. 49,
52 (Vesta Plaintiffs Group's counsel states present intention to name
Torchmark and asserts that the others "may become defendants here"); Jt.
Mem. 19 ("Morgan Stanley most likely also will be named as a defendant in
this litigation."). The asserted conflict may never arise. Cf. Gluck, 976
F. Supp. at 547 (noting that "[t]here is, of course, a marked difference
between affirmatively demonstrating that [an institution] is not an
adequate representative or is subject to unique defenses and simply
======END OF PAGE 30======
claiming that [it] might be subject to such arguments in the future").
Moreover, the Florida Board has represented to the Court that "it is
committed to bring into this litigation defendants against whom [it] [has]
viable claims." Tr. 69; accord Tr. 60.
C. The Court Should Not Appoint "Co-Lead Plaintiffs."
The Commission recognizes that neither the Florida Board nor the Vesta
Plaintiffs Group has requested appointment as "co-lead plaintiff." See Bd.
Supp. Mem. at 22; Jt. Resp. at 3. However, the Vesta Plaintiffs Group
already has propounded a number of alternative lead plaintiff proposals,
stated a willingness to consider a "unified position" with the Florida
Board (Tr. 76), and relied heavily on Oxford, 1998 WL 400741. Because of
the possibility that the Vesta Plaintiffs Group may yet seek appointment as
"co-lead plaintiff," the Commission wishes briefly to explain its position
that such an arrangement is contrary to the language and purposes of the
Litigation Reform Act.
Congress prescribed specific procedures and criteria in the Act for
the determination of the most adequate plaintiff, and singled out large
investors as the presumptive most adequate plaintiff. In establishing that
The Vesta Plaintiffs Group argues that its lawsuit
against Vesta in state court is a valid basis for
preferring it as lead plaintiff to the Florida Board.
See Tr. 53-54. The fact that the Vesta Plaintiffs
Group has sued Vesta in state court, however, is not
proof that the Florida Board will inadequately
represent the class in this action. Moreover, to
appoint a lead plaintiff in a federal action based on
who is leading a state court action could permit an end
run around the lead plaintiff provisions and invite
possible gamesmanship. See Janet Cooper Alexander, Do
the Merits Matter? A Study of Settlements in
Securities Class Actions, 43 Stan. L. Rev. 497, 528-29
n.117 (1991).
======END OF PAGE 31======
presumption, Congress expressed its clear policy judgment that a certain
type of investor -- the investor with the largest financial interest in the
litigation -- could more effectively lead the securities fraud class action
than any other member of the class. The Commission believes that there is
no basis in the statute or the legislative history for a court to compel a
single movant that satisfies all of the criteria for appointment as lead
plaintiff and which objects to divided leadership of the class action to
join a faction of competing lead plaintiff movants.
The language of the Act strongly indicates that Congress did not
intend for there to be multiple lead plaintiffs. The Act speaks in the
singular, of the court appointing a "lead plaintiff," not lead plaintiffs.
It provides a mechanism for identifying "the most adequate plaintiff," not
the two or more most adequate plaintiffs. It specifies that the most
adequate plaintiff is presumptively that which "has the largest financial
interest" in the case. It seems unlikely that Congress contemplated that
in the typical case there could be more than one plaintiff with "the
largest" financial interest.
The mere fact that the lead plaintiff provisions refer to "the member
or members of the purported plaintiff class" and "person or group of
persons" as lead plaintiff does not mean that there can be multiple lead
plaintiffs. Under the statutory presumption, multiple class "members" or
"persons" can be appointed lead plaintiff only to the extent that they form
The Commission takes no position on whether it would
ever be appropriate to appoint co-lead plaintiffs in
situations not present here, such as where two
plaintiffs have virtually the same stake in the
litigation, rendering the statutory language ambiguous
or uncertain in its application, or where two
plaintiffs seek to represent discrete class periods.
======END OF PAGE 32======
a single "group." The statute refers to a "person or a group of persons,"
not a combination of multiple groups or multiple persons not part of one
group. As discussed above, a "group" must serve the same statutory
purposes as a "person," which requires it to have unified decisionmaking.
There is no indication that Congress intended in specifying detailed
criteria for appointment of the lead plaintiff to give plaintiffs a basis
for urging courts to exercise wide discretion to combine class members and
loss amounts and create coalitions.
Were the plaintiff with the largest financial interest to be joined by
competing "co-lead plaintiffs," that plaintiff's ability to negotiate
effective legal retention agreements, to control the litigation, and to
control the conduct of lawyers would be dissipated. See Cendant, 1998 WL
598337, *5. Institutional investors, which are already reluctant to seek
lead plaintiff status, might be even more reluctant to do so if
they could not exercise effective control of the litigation, and instead
had to share decisionmaking authority and possibly engage in disputes with
"co-lead plaintiffs." See SEC Report, 51-52; D'Hondt, 1997 WL 405668, *4
n.9 (noting that institution "elected not to seek the status of a Lead
The Commission has reported that "[i]n the 105 cases
filed in the first year after passage of the Reform
Act, we have found only eight cases in which
institutions have moved to become lead plaintiff." SEC
Report, 51. More recently, SEC Commissioner Isaac C.
Hunt, Jr. testified that as of October 29, 1997, out of
124 federal class actions filed as of that date in
1997, the Commission was aware of only six in which
institutions had sought lead plaintiff status.
Testimony of Securities and Exchange Commission
Concerning S. 1260, the "Securities Litigation Uniform
Standards Act of 1997," Before the Subcommittee on
Securities, Committee on Banking, Housing, and Urban
Affairs, U.S. Senate (Oct. 29, 1997).
======END OF PAGE 33======
Plaintiff" because it "would prefer to separately litigate its claims so as
not to impair its autonomy"). Appointing competing lead plaintiff
applicants as "co-lead plaintiffs" would dilute their ability to manage the
litigation and supervise counsel effectively.
Several courts have expressly disapproved the appointment of competing
"co-lead plaintiffs." In Gluck v. Cellstar Corp., 976 F. Supp. 542, 549-50
(N.D. Tex. 1997), the court rejected a plaintiff group's request that it be
appointed "co-lead plaintiff," along with an institutional investor:
The best way for the Court to effectuate the purposes
of the Reform Act is to appoint [State of Wisconsin
Investment Board, "SWIB"] to serve as sole Lead
Plaintiff. Increasing the number of Lead Plaintiffs
would detract from the Reform Act's fundamental goal of
client control, as it would inevitably delegate more
control and responsibility to the lawyers for the class
and make the class representatives more reliant on the
lawyers. It would also reduce the influence and
responsibility of SWIB, something Congress clearly did
not wish the Court to do. Further, appointing co-Lead
Plaintiffs would unnecessarily increase the time and
expense spent on preparing and litigating the case,
especially if the co-Lead Plaintiffs decided to hire
co-Lead Counsel. * * * [W]here the interest of one
institutional investor in the litigation far exceeds
the interests of other purported plaintiffs, nothing
persuades the Court to appoint co-Lead Plaintiffs.
[Citations omitted.]
Similarly, in Steiner v. Frankino, No. 1:98 CV0264, slip op. at 12
(N.D. Ohio July 16, 1998), the court rejected a movant's proposal that
"there be two sets of lead plaintiffs and two lead counsel," one set chosen
by it and one set chosen by a competing movant. The court appointed the
movant with the largest financial loss, stating that:
In enacting the [Litigation Reform Act], Congress
realized that a few plaintiffs' lawyers controlled
securities litigation and it wanted to vest control
with large investors. Previously, plaintiffs' counsel
in securities cases were more concerned with their own
financial interest rather than those of their clients.
======END OF PAGE 34======
Increasing the number of lead plaintiffs and thus lead
counsel would detract from the goal of client control
because it would inevitably give more control and
responsibility to the lawyers causing the class
representatives to be more reliant on the lawyers. It
would also increase time and expense spent in preparing
and litigating the case. In the present case, each
group is represented by several firms. Allowing two
sets of counsel would not further the purposes of the
[Act].
Id. (citations omitted); accord Cendant, 1998 WL 598337, *3, *5 (denying
"all motions for appointment as co-lead plaintiff that do not challenge the
[largest stakeholder's] statutory presumption of adequacy," including
motions "offer[ing] little more than the general assertion that diversity
of representation would benefit the class" or "the argument that additional
plaintiffs bring to the litigation other counsel capable of advancing
additional funds"). See In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156,
157-58 (S.D.N.Y. 1997) (rejecting proposed lead plaintiff "group" comprised
of two movants); Malin v. Ivax Corp., No. 96-1843, Order at 7 (S.D. Fla.
Nov. 1, 1996) (rejecting individual investor's request to serve as "co-lead
plaintiff" with movant with "substantially" larger loss).
The only decision of which the Commission is aware that has attempted
to set forth a rationale for the appointment of "co-lead plaintiffs" is In
re Oxford Health Plans, Inc. Sec. Litig., No. MDL-1222, 1998 WL 400741
(S.D.N.Y. July 15, 1998). In Oxford, the court appointed "co-lead
plaintiffs" despite the fact it determined that one lead plaintiff movant
with a larger financial interest than any of the other competing movants
combined met all of the criteria for appointment as lead plaintiff. The
Commission disagrees with the Oxford court's reasoning in appointing "co-
lead plaintiffs."
======END OF PAGE 35======
Language in the Oxford opinion suggests that the court may have been
concerned about adequacy of representation and the resources needed for
litigation. However, rather than addressing any such concerns
within the framework of the Act itself, under an adequacy of representation
analysis or through an evaluation of the counsel arrangement proposed by
the movant with the largest financial interest, the Oxford court
misinterpreted and essentially disregarded the statutory presumption.
Moreover, the Oxford court, in substituting its own "principle of providing
the class with the most adequate representation" for the statutory
presumption of the "most adequate plaintiff," relied on policy
considerations such as "diverse representation" that Congress rejected in
adopting the Act. See 1998 WL 400741, *8.
Rather than erroneously appointing multiple lead plaintiffs, the
Oxford court should have exercised its traditional discretion to evaluate
counsel and adequacy of resources. As noted in Cendant, 1998 WL 598337,
*7, "[i]n contrast to the strictly defined procedures and considerations
that prescribe the determination of lead plaintiff * * * the Court's
See 1998 WL 400741, *5 (expressing concern that an
institution that funds the litigation might "become[]
conflicted and have to drop out"); *8 ("[t]he
rebuttable presumption created by the [Act] which
favors the plaintiff with the largest financial
interest was not intended to obviate the principle of
providing the class with the most adequate
representation"; "[i]n light of the magnitude of this
case, the Court concludes that the use of three lead
plaintiffs * * * allows for broad representation and
the sharing of resources and experience to ensure that
the litigation will proceed expeditiously against
Oxford and the experienced counsel it has retained to
represent it"); see also id. at *9 (expressing concern
about "potential defenses * * * successfully
rebut[ting] a finding of typicality").
======END OF PAGE 36======
approval [of the proposed lead counsel] is subject to its discretionary
judgment that lead plaintiff's choice of representative best suits the
needs of the class." As noted above, Cendant, id. at *5,
rejected "the argument that additional plaintiffs bring to the litigation
other counsel capable of advancing additional funds" as a basis for
appointing "co-lead plaintiffs."
The Oxford court's suggestion that "the lead plaintiff movants are not
in fact competing with each other," 1998 WL 400741, *8, ignores the fact
that Congress determined that certain members of the class are more
effective representatives than others. Regardless of whether the court
believes that "each plaintiff [can] control its own chosen counsel," id.,
competing views among the co-lead plaintiffs will necessarily diminish
their ability to control the litigation. Cf. Cendant, 1998 WL 598337, *4
("representation by a disparate group of plaintiffs * * * could well hamper
the force and focus of the litigation"). There is no question that as a
general matter the existence of several lead plaintiffs will diminish the
bargaining power (e.g., with respect to retention of counsel) of the lead
The Litigation Reform Act provides that selection and
retention of lead counsel by the "most adequate
plaintiff" shall be "subject to the approval of the
court." 15 U.S.C. 78u-4(a)(3)(B)(v). The legislative
history states that Congress "does not intend to
disturb the court's discretion under existing law to
approve or disapprove the lead plaintiff's choice of
counsel when necessary to protect the interests of the
plaintiff class." Conf. Rep. 35. Courts have
exercised that discretion, for example, to review "co-
lead counsel" proposals under the Act. See, e.g.,
Donnkenny, 171 F.R.D. at 158 (allowing lead plaintiff
to select co-lead counsel "provided that there is no
duplication of attorneys' services, and the use of co-
lead counsel does not in any way increase attorneys'
fees and expenses"); Lax, 1997 WL 461036, *7 (same).
======END OF PAGE 37======
plaintiff with the largest stake in the case and will dilute its ability to
control both the litigation and the lawyers.
It was argued by certain plaintiffs in Oxford that the Commission's
position could exclude institutions that do not have the largest financial
interest from participating in class actions as "co-lead plaintiffs." The
simple answer is that if the institution does not have the largest
financial interest and if the other institution, the individual, or the
properly constituted group which has that interest determines that it is
not advisable to join forces with the institution, then the institution
does not satisfy the largest financial interest requirement and cannot
serve as lead plaintiff under the plain language of the Act. See 15 U.S.C.
78u-4(a)(3)(B)(iii)(I)(bb).
The Commission's position does not prevent any institution from moving
for appointment as lead plaintiff and, if the motion is denied,
participating in the case in other important ways. See In re Horizon/CMS
Healthcare Corp. Sec. Litig., 3 F. Supp. 2d 1208, 1214 (D.N.M. 1998)
(compensating counsel for two institutions that had not sought lead
plaintiff status but had persuaded the court to reduce the percentage of
class counsel's attorney fees; the institutions produced and reviewed
documents, retained economic experts who "conducted a full-scale damage
analysis which included extensive document review, consultation * * * and
preparation of documents and testimony," prepared briefs, and presented
argument). What the Commission's position does ensure is that if an
institution qualifies as lead plaintiff it will have the greatest possible
control of the litigation.
======END OF PAGE 38======
Finally, the Vesta Plaintiffs Group expresses concern that the Florida
Board can "rush[] in" without filing a complaint, seek "to be the * * *
only" lead plaintiff, and, if successful, "push [them] out." Tr. 74. The
Vesta Plaintiffs Group asserts that "[w]e were the ones that looked into
[the case], alleged it, and pursued it." Id. The Commission believes that
these are legitimate concerns. Few institutions have initiated securities
fraud class actions after passage of the Litigation Reform Act. Even if an
institution is accorded exclusive lead plaintiff status in a case, care
should be taken not to discourage others from commencing meritorious
actions and being appropriately compensated for so doing. Lawyers can
perform a useful service in identifying and bringing legitimate class
actions.
However, these concerns do not relate to the statutory criteria for
appointment of lead plaintiff, do not override the provision of the Act
specifically authorizing class members who have not filed a complaint to
move for appointment as lead plaintiff, and must be addressed in other ways
than through lead plaintiff appointments. Although the Litigation Reform
Act restricts total payment to counsel to "a reasonable percentage of the
amount of any damages and prejudgment interest actually paid to the class,"
Exchange Act Section 21D(a)(6), 15 U.S.C. 78u-4(a)(6), the court can and
should award compensation to law firms, even if not lead counsel, that do
work investigating and bringing meritorious securities actions. Congress
sought to encourage "thoroughly researched" complaints and "diligence in
drafting complaints." Conf. Rep. 33. Moreover, appointment of a sole lead
plaintiff and approval of its chosen counsel does not prevent that counsel
from "utiliz[ing] the talents and expertise of the various firms who were
======END OF PAGE 39======
retained by other plaintiffs in this action in their position as lead
counsel." Malin v. Ivax Corp., No. 96-1843, Order at 8 (S.D. Fla. Nov. 1,
1996).
CONCLUSION
For the foregoing reasons, the Commission is aware of no reason that
the Court should not consolidate all of these actions without limitation.
The Commission believes once the Vesta Plaintiffs Group is limited to a
size capable of effectively managing the litigation and supervising
counsel, the Florida Board has the largest financial interest in the
litigation and thus, under the terms of the Litigation Reform Act, is
presumptively the most adequate plaintiff. In the factual context of the
present case, that presumption can be rebutted only by "proof" that the
Florida Board "will not" be an adequate lead plaintiff. Finally, the
Commission believes that regardless of whom the Court appoints as lead
plaintiff, the Court should not appoint a competing plaintiff as "co-lead
plaintiff."
Respectfully submitted,
___________________________________
HARVEY J. GOLDSCHMID
General Counsel
___________________________________
ERIC SUMMERGRAD
Principal Assistant General Counsel
___________________________________
LUIS de la TORRE
Attorney
Of Counsel
PAUL GONSON Securities and Exchange Commission
Solicitor 450 5th Street, N.W. (Stop 6-6)
======END OF PAGE 40======
Washington, D.C. 20549
(202) 942-0813 (de la Torre)
Dated: September 24, 1998
======END OF PAGE 41======